With the presidential election in the rearview mirror, a new administration incoming, and a new year on the horizon, it's natural to wonder what 2025 may bring. In a speech to the Economic Club of Chicago on October 15, now President-elect Trump remarked that “the most beautiful word in the dictionary is ‘tariff,’ and it’s my favorite word.” This statement echoed speeches from the campaign trail, where President-elect Trump repeatedly indicated a desire for the new administration to re-institute tariffs on a wide range of imported goods.
Estimates of which goods these tariffs will target vary, but pundits generally believe that goods imported from China will ultimately be hit with something in the neighborhood of a 40% tariff, though the tariffs could be as high as 60%. There is also speculation that the Trump administration could levy a tariff of at least 10% on all other goods imported to the United States. President-elect Trump has recently indicated that he will institute a tariff of 25% upon all goods imported from either Mexico or Canada on the first day of his second term, along with an additional 10% on goods imported from China.
Placing tariffs on goods from these countries should significantly impact the cost of materials and equipment that are critical to the construction industry. China primarily exports integrated circuits, electronic equipment, and computers to the United States. A significant portion of furniture and prefabricated building components in the United States also comes from China. The United States’ largest import from Canada is oil, followed by approximately $11 billion worth of lumber. The United States’ primary imports from Mexico include automobiles, plastic products, electrical machinery, and equipment. Additionally, Mexico is a major exporter of aluminum doors, windows, and frames. Both Mexico and Canada are significant suppliers of steel and plastic building materials to the United States.
Therefore, placing a 25% tariff on Canadian lumber, for instance, would substantially increase the cost of constructing wood-frame structures. Similarly, since Canada and Mexico are major oil suppliers to the United States, a 25% tariff on oil from either country would drive up the price of gasoline, asphalt, and other petroleum-based products.
By placing tariffs on these goods, economists forecast that domestic prices will increase (potentially costing individual households an extra $2,600 annually). Products that are assembled in the United States but contain a significant number of components manufactured overseas will be particularly affected. For example, companies like Black and Decker expect the cost of their power tools to increase by 60% to 70% . Levying tariffs may also lead to increased inflation. Some economists anticipate that a flat 10% tariff on all imports into the United States could increase inflation by 0.8%.
Owners and developers should take proactive measures to insulate their projects from the impacts of tariffs. To the greatest extent possible, avoid using materials and equipment imported from China, as these goods seem to be the target of the highest tariffs. If feasible, owners and developers with significant projects on the horizon should consider purchasing materials and equipment in advance and storing those items in dedicated storage areas on-site, laydown yards, or in bonded and insured warehouses until construction begins.
Any tariffs will increase the costs of materials, equipment, and other construction inputs that are imported into the United States. High tariffs could also disrupt existing supply chains by forcing parties to search for alternative, less expensive sources of materials and equipment. General contractors will likely pass this increased risk (and increased costs) to property owners and developers. Accordingly, owners and developers should prepare for the costs for new construction projects to remain high in 2025, as contractors grapple with volatility in the cost and supply of construction materials.
To address this, owners and developers should continue to include clauses in their contracts with general contractors that allocate responsibility for addressing price increases and supply chain disruptions to the party in the best position to mitigate those risks. Additionally, owners and developers should encourage and incentivize their general contractors to finalize the project buyout as early as possible to reduce the risk of unexpected cost increases. Carrying larger-than-normal contingencies would also help owners and developers cover these unforeseen and unpredictable risks.
Broad tariffs are nearly impossible to avoid entirely. Therefore it will be essential for project owners and developers to incorporate specific provisions in their construction contracts addressing tariffs as a cause of unforeseen price increases. The timing of when tariffs take effect is crucial. If tariffs become effective while negotiating a contract with the general contractor, then the resulting cost increases should be incorporated directly into the stipulated sum or guaranteed maximum price. If tariffs are imposed during construction, a general contractor will likely demand an adjustment to the Contract Sum. This further reinforces the importance of carrying larger-than-normal contingencies within the Contract Sum and purchasing all critical materials needed for the project as quickly as possible.
While it remains uncertain whether tariffs will be enacted, it appears likely that some additional tariffs will be included in the Trump administration’s economic plan. Property owners and developers should begin preparing and planning accordingly so they are in the best position to weather this storm.
Morris, Manning & Martin’s Construction Law Practice Group is experienced in representing owners and developers of commercial and industrial properties. If you need any assistance in the process of drafting and negotiating design, engineering, or construction contracts please contact Bruce Smith, chair of MMM’s Construction Law Practice Group, Colby Nelson, or JD Howard.
